3 min read.Updated: 18 Jul 2019, 12:55 AM ISTNeil Borate
The 2019 budget has proposed to include CPSE ETFs in the ELSS category that is eligible for tax deduction, but past returns have not been inspiring
Since CPSE ETFs may now come in the ELSS category, investors may have to contend with a three-year lock-in
The fifth tranche of Central Public Sector Enterprises exchange-traded funds (CPSE ETFs) is opening for subscription for retail investors on 19 July. Less than a fortnight ago, Budget 2019 proposed to include CPSE ETFs in the equity-linked savings scheme (ELSS) category under the Section 80C tax deduction basket. So should you buy?
All categories of investors in this tranche, a further fund offer (FFO), are being offered a discount of 3%. However, the extent of discount offered is the lowest-ever, in comparison to the previous tranches, which were launched with a discount in the range of 3.5% to 5%.
The CPSE ETF was launched for the first time in March 2014. Thereafter, four tranches were offered in January 2017, March 2017, November 2018 and March 2019.
The first offering also came with an offer of bonus units for every 15 units of the ETF held for more than a year. No such bonus was offer thereafter and is not available this time either.
Performance and portfolio
The CPSE ETF, which invests in 11 public sector companies, has given an annualized return of 5.55% for three years and just 0.28% for five years, as on 15 July, according to data provided by Value Research. In comparison, the Sensex Total Return Index has given 12.63% annualized return over the past three years and 10.89% over the past five years.
Though the past four tranches cumulatively raised about ₹38,500 crore, the assets under management (AUM) of the ETF have dwindled to just about ₹9,682 crore, as on 30 June 2019, according to data provided by Value Research.
The fund currently has a portfolio of 11 public sector enterprises. Four companies—Oil and Natural Gas Corp., NTPC Ltd, Coal India Ltd and Indian Oil Corp. Ltd, account for 17-20% each of the ETF, adding up to almost 80% of its weight. This makes the ETF highly tilted towards a single sector—energy.
“The CPSE ETF is highly skewed towards oil and gas, as well as power. We would not recommend such an unbalanced fund. Even among PSUs, investors can select better companies than those in the CPSE basket," said Prateek Pant, co-founder and head of products and solutions at Sanctum Wealth Management.
Amol Joshi, founder at Plan Rupee Investment Services added that the government ownership is the only common thread in the companies in the CPSE ETF. “Government is a poor manager of business as the cases of PSU banks and Air India shows," he added. He further dismissed the idea of investing for the purpose of availing the Section 80C deduction. “Investment decision should not be based solely on tax saving. Other tax saving avenues are available under Section 80C," he added.
Some experts say the discounts work in favour of the investors. “Historically, investors have made money in the ETF due to the discounts. This time it is even more attractive because consumer facing companies like auto and FMCG are facing a slowdown. The CPSE ETF includes many cyclical companies which are trading at low valuations and are expected to benefit from lower interest rates as well as alignment with key government initiatives," said Gaurav Awasthi, senior partner, IIFL Wealth Management Ltd, a financial advisory firm.
Also, from a valuation point of view, the CPSE ETF looks cheap. Its price-to-earnings or PE ratio (as of 15 July 2019) is 7.88 compared to 23.72 for the Nifty 50. Its price-to-book or PB ratio at 1.30 is also low compared to 2.90 for the Nifty 50. Other things being equal, a lower PE ratio and PB ratio denote a cheaper stock or portfolio of stocks. However, low valuations may reflect the poor prospects of the companies that constitute CPSE ETF and they may not match the index average over a period of time.
There is little reason to subscribe to a concentrated basket of companies whose sole common property is government ownership. Historically, the return on equity on government companies has been poor and they have steadily lost ground to their private sector rivals as seen in the cases of BSNL, PSU banks and Air India. The 11 companies in the CPSE basket are also heavily tilted towards the energy sector, making the ETF equivalent to a sector fund. The discount on offer is also the lowest on record. Only very optimistic investors will find value in the current CPSE ETF tranche.
Those looking to invest for tax-saving should note that the budget proposal has not been notified as yet. In addition, such a benefit is also likely to come with a three-year lock-in. For investors who are looking to save tax, exiting quickly after taking advantage of the discount may not be an option.
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